Public debt (mitigated by long maturity and increasing share of local currency-denominated)

RISK ASSESSMENT

New found strength in the wake of regional circumstances

In 2017, Uruguayan growth rebounded after two years in the doldrums. Activity was sustained by exports and household consumption. The economy benefited from the resumption of growth in Brazil and Argentina, as well as the rebound in agricultural export prices (soya, meat, dairy products). Internally, consumption regained some momentum thanks to lower inflation, which fell back to within the target range (3%-7%) fixed by the central bank.

Activity is expected to remain buoyant in 2018, with growth being driven by all sectors. Investment is thus expected to rebound after a sluggish year, thanks to the Ferrocarril Central railway infrastructure project, which aims to facilitate the transport of goods (especially wood) to the port of Montevideo (public/private financing estimated at USD 1 billion). This project is specifically the subject of negotiations with the Finnish UPM group regarding the potential construction of a third pulp mill, which is set to be the largest private investment project ever undertaken in Uruguay (USD 4 billion). Consumption is expected to slow because of the jump in inflation as a result of the peso’s devaluation against the dollar after a year of stability. However, inflation will remain around the upper limit fixed by the central bank, thanks to more modest wage rises, which themselves are largely due to the gradual indexing of wages to sectoral activity rather than to inflation. Externally, the strengthening economic recovery in Brazil, the country’s main client for exports of goods, and in Argentina, principal source of FDIs and tourists, should also sustain growth.

Gradual fiscal consolidation and slight deterioration of the current account balance

After public accounts were hit by weak activity in 2016, the government pursued a more restrictive fiscal policy in 2017. The government has accordingly implemented the fiscal consolidation programme set out in its five-year finance act of 2015, aimed at achieving a 2.5% public deficit by the end of President Tabaré Vázquez’s presidential term in 2019. The government’s strategy relies notably on higher tax revenues, thanks to the economic momentum gained through VAT, as well as higher income taxes in particular (between four and six points, depending on the tax band) that came into force in 2017. In 2018, in order to finance the increased education budget, set to reach 5% of GDP, the government decided to raise one of the taxes levied on imports: Consular Duty or tasa consular. While the public debt burden remains considerable, the authorities have gradually increased the share denominated in local currency and held by residents (over 55% at the second quarter of 2017, compared with just 30% in 2007) and extended the average maturity (fourteen years), thus lessening its vulnerability.

Meanwhile, in 2017, the current account deficit widened slightly, due to rising imports resulting from the recovery in internal demand. While exports also rebounded, thanks to the aforementioned improved economic prospects, they only partially offset the rise in imports. In 2018, Uruguayan exports are expected to continue to be driven by stronger growth in its main partner markets. At the same time, imports are expected to remain buoyant thanks to the resilience of consumption and the recovery in investment. After a sharp rise in the number of tourists (mainly from Argentina) in 2017, the services balance looks as if it will take a hit in 2018 from the ending of tax benefits at the end of March (partial or total VAT exemption depending on the service) reserved for tourists. The current account deficit is, therefore, expected to grow slightly.

The governing coalition faces divisions and allegations of corruption

President Tabaré Vazquez is facing allegations of corruption concerning the previous government, related to his centre-left coalition Frente Amplio (FA), and in particular his vice president, Raul Sendic, who stepped down in September 2017. Moreover, President Vazquez is facing a sharp drop in his popularity (around 30% approval ratings in mid-2017). A sign of his fading popularity is that the right-leaning opposition party (Partido Nacional) was ahead in the polls in mid-2017 for the first time since 1994. Meanwhile, the governing coalition is characterised by sharp divisions between the Communist wing and President Vazquez’s moderate wing, as evidenced by the latter’s decision to vote in favour of the temporary exclusion of Venezuela from Mercosur in August 2017. The divisions within the coalition also concern the free-trade agreement on services signed in October 2016 with Chile, to which the left wing of the Party is opposed, and which Parliament still hasn’t ratified one year on. Uruguay remains a particularly stable country politically.

Despite there being significant room for progress on financial transparency, Uruguay is a preferred destination for FDIs in the region, thanks to a favourable business climate overall.